Quote from @Dan H.:
Historically I have been very pro San Diego RE investing, but with the current rates and realistic underwriting (most underwriting has at best a poor guess of sustained maintenance/cap ex) is huge negative cash flow at investor LTV. And much worse at the real high LTV possible via OO.
if typical rent to purchase ratio is ~0.5% and a good ratio is 0.7%, these will be cash flow negative. With the current rates and realistic underwriting you need better than 1% ratio local to have sustained cash flow. This is a unicorn find.
so my once ecstatic view of San Diego RE investing is tempered significantly. I believe REI can still do ok with value adds (but I question your thoughts on the brrrr as after a high LTV refi it will bleed cash) or long holds. Remember making money does not imply a decent ROI. If a property appreciates $50k, but is negative $36k (investor LTV) when allocating for sustained expenses) the return is far less than $50k (maybe $20k when including equity paydown). This return does not justify the work and risk. On $1m, 80% LTV means maybe $220k including closing costs to make 10%. That is about the S&P lifetime return but S&P is passive. Certain syndication have track record of double that return. However, my conservative underwriting has been depicting no near term appreciation since 2022 (fortunately we are still getting decent appreciation) and very little near term rent growth since 2022 (which has largely been accurate).
So you do a value add and obtain some sweat equity to enhance the early returns to spruce up the returns until rent growth can create cash flow or you purchase rent ready and recognize the early returns will be pathetic (maybe even negative) and plan to hold it long enough to achieve a good return. I suspect virtually all local RE investors will do well with a hold of 10 years or longer.
Note prior to 2022, the cash flow picture was very different. Properties could be purchased with near term returns worthy of the effort and risk. Today, value add to achieve maybe 50% early accelerated return (10% of asset at 80% LTV). Maybe use accelerated depreciation to get additional early benefits. The negative cash flow bites into this early return but hopefully before the early return is consumed there is some positive cash flow that will increase most years (largest expense is fixed (P&i), property tax is near fixed).
You are correct about our evictions being near lowest in the country but if you only look at that, is it a result of quality tenants or the challenges of getting an eviction? If you add we have near lowest delinquency rate in the country it shows that we have quality tenants. We have quality tenants because there is a housing shortage. A tenant with poor LL reference will have a difficult time finding quality housing in San Diego. So tenants pay on time and take decent care of the units.
My view is residential RE is not passive or risk free. The returns must beat passive options by a margin that warrants the work and risk. I think this mostly requires value adds (more work) and hold time.
Good luck
Kinda late to the party, but I agree 100% with @Dan H. on this! Same thing in San Francisco IMO. I just don't think the squeeze is worth the juice these days. Interest rates, construction costs, insurance rates, city permitting hassles have all increased, while rents are still lower than peak years. I also think that the crazy high appreciation we had over the last 20-30 years will be tempered going forward. So you're looking at hitting singles, maybe doubles at best. But I like, and I am used to, hitting triples and home runs! So at this point I've kept my best properties debt free, and sold off other props where I didn't see a high appreciation/gentrification future. Frankly I've also reached "my number", so I am less inclined to take all the risks involved with BRRRR, especially in places like SF where tenant laws are not in your favor.
The only thing I would still highly recommend is for younger investors to do BRRRR on well purchased owner occupied 2-4 property. That gets them on the property ladder as well as a place to live. Done right that's still a solid pursuit IMO. Good luck out there!
